Published in Finance

M&A activity may peak, but should remain elevated in 2016

BY Sunday, January 24, 2016 10:13pm

If you want to sell your business this year, you still have a pretty good chance of cutting a favorable deal as the seller’s market continues.

Professionals who work in mergers and acquisitions say the market remains strong early in 2016 for deals of all sizes, from small businesses to the middle market and up. Key deal drivers are readily available credit and capital for transactions, as well as high valuations that prompted some sellers to come to the market.

“The timing is right for a lot of companies to sell and cash out of their business,” said Eugene Franks, an attorney at the Muskegon office of Smith Haughey Rice & Roegge PC. “Based on what I’ve seen, it’s a good time to be a seller — and continues to be.”

Deal volumes remain high among both small business and middle-market transactions, the latter of which often has strategic buyers competing with private equity firms for an acquisition. On top of that is continued moderate economic growth that’s contributing to the M&A environment, said Kevin Hirdes, managing partner at NuVescor Group LLC.

The Grand Rapids firm, which works in the lower middle market, had a strong year in 2015 and expects another one for 2016. NuVescor entered the new year with 20 letters of intent for clients across multiple sectors, by far the highest ever at one time, Hirdes said.

Perhaps the biggest challenge to deal flow he and other brokers face right now is finding enough quality prospects for would-be buyers.

“We certainly need more sellers. Our inventory is dwindling,” said Hirdes, who expects a strong M&A market to continue well into 2016.

“I think ’16 is feeling pretty good out of the gate and I would anticipate that it will stay that way for at least some period of time to come,” he said. “Just from our inventory and pipeline of deal flow currently, it looks like ’16 is going to be a terrific year.”

M&A attorneys, brokers and senior business executives surveyed late last summer by law firm Dykema expected M&A activity to continue at a good pace this year, although there was some indication that it was peaking toward late 2015.

Only 37 percent of respondents to Dykema’s survey said they expected a stronger M&A market in 2016. That compares to 59 percent a year earlier who expected strengthening in 2015. Twenty percent of the survey respondents expected the M&A market to weaken this year, compared to just 9 percent a year earlier.

Meanwhile, 42.7 percent of respondents expect no significant change in 2016.


Tom Vaughn, co-leader of the Dykema M&A practice at the firm’s Detroit office, said the results of the survey, conducted in August and early September in a cross-section of economic sectors, reflect a market that’s been in an extended period of strong activity.

“Our respondents are beginning to wonder how long this pace is sustainable,” Vaughn said. “We definitely saw a lot more concern about whether we’re starting to reach the peak of M&A activity.”

Even with the tempered expectations, survey results still indicate “continued, strong M&A activity at least through 2016,” Vaughn said.

The Dykema report notes that the survey occurred “during a period of acute turmoil for world markets and the lead-up to the Federal Reserve’s September 2015 decision on interest rates — which may have heightened dealmakers’ concerns regarding these issues.” Ultimately, the Fed opted not to increase rates in September, but did move rates up a quarter of a point at its December meeting.

Nearly half of survey respondents cited the availability of capital as the factor most responsible for fueling activity, followed by 22 percent who cited the U.S. economy and 17 percent who noted favorable interest rates.

Expectations for Michigan were more optimistic than the national results. Among the Michigan respondents to the Dykema survey, 45 percent expected the M&A market in the state to strengthen in 2016, said Brian Page of Dykema’s Grand Rapids office.

Compared to the U.S. as a whole, Michigan may see a higher percentage of foreign buyers coming into the market for a deal, Page said. The automotive sector should remain active as well, he added.

M&A attorneys and business brokers say the strong market has left valuations high for many transactions and often enables them to present multiple sale proposals to their clients who are exiting a business for whatever reason.


M&A attorney Tracy Larsen of the Grand Rapids office of Barnes & Thornburg LLP reports an “absolutely gangbuster year” for 2015 with significant deal activity and a “very competitive” market that was dominated by strategic and private equity buyers. A majority of the deals Larsen’s working on right now have private equity buyers, as well.

“Private equity wants to get their capital deployed. There were a lot of bolt-on acquisitions last year by private equity, but also some significant platform acquisitions that they’ll go ahead and build on here in the ensuing years. So it’s just a very frothy market,” said Larsen, who generally works in structured sales processes.

“Every sales process that I did in 2015, and I was involved in lots of them, had competitive bidders,” Larsen said. “The very strong companies that come to market are always going to attract a lot of attention, and there were a lot of very strong companies that came to market last year.”

That’s a contrast to when the U.S. economy was coming out of recession five years ago and “oftentimes, we got very few bidders on transactions,” and sometimes none, he said.

Across the U.S., private equity accounted for a record 71.5 percent of all middle-market buyout activity, according to the most recent private equity report from Pitchbook.com. Competition among private equity firms “is becoming significant, since the inventory of companies worth buying isn’t limitless,” according to Pitchbook’s November report.

“With plenty of dry powder and access to debt, PE investors have flocked to the middle market in search of more reasonably priced, worthwhile opportunities. But that push has now helped drive up valuations at the upper reaches of the middle market, especially as there aren’t that many quality targets in that size range,” Pitchbook reported.

Larsen reported multiples in the double digits for deals in certain sectors such as health care and technology. Manufacturing companies, however, are in the historic range of the mid-single digits.

Multiples should remain high as long as demand from buyers outpaces the availability of good prospects on the market, said Vaughn of Dykema.

“Multiples will follow pretty closely (to) deal volume activity,” he said.


Despite the higher competition for deals, Grand Rapids-based private equity firm Blackford Capital has found no shortage of opportunities for making acquisitions in Michigan, said Managing Director Jeff Helminski.

Nor does Blackford Capital have any problem getting deals financed, as banks are “very aggressive” in offering support for M&A, he said.

“There’s a lot of demand on the credit side and the debt side for the types of deals that we do,” Helminski said. “It’s very, very aggressive, both in the rates coming down and the amount of money.”

In the small business market, “there’s no shortage of buyers” for the right opportunity, said business broker Max Friar of Calder Capital LLC in Grand Rapids. The interest is particularly high for small businesses whose owners are not involved in the day-to-day operations, which makes for a smoother transition to the buyer.

“If you have a company that makes money and is not entirely dependent on that owner, there’s a buyer for that company,” Friar said. “It makes the appetite for making an offer in those types of businesses much higher.”

Bizbuysell.com, an online portal that lists small businesses for sale nationally, reports handling 3.6 percent fewer transactions in 2015, although the decline came from a record year in 2014.

“Part of the reason transaction activity stabilized in 2015 may be that small businesses continue to grow financially healthier, allowing owners to ask for more money, creating a more balanced market,” according to Bizbuysell.com’s fourth quarter Insight report that details activity for the year.

Still, the improved financial performance did allow small businesses listed on the website to ask and get a higher price from buyers. The median sales price in 2015 increased 7.6 percent to $199,000, according to the website.

Given the strong seller’s market and the ability for some business owners to get a premium for their companies, executives do need to make sure they don’t set an asking price that’s too high, Friar said.

“At the end of the day, it has to be fair,” he said.


Barring a major global event that throws the U.S economy into turmoil, M&A professionals don’t see anything on the horizon that can significantly slow activity this year. Rising interest rates, unless they go up dramatically, won’t affect the market, either.

The quarter-point increase in the federal funds rate in December “is really not that significant,” said Hirdes of NuVescor.

“A rate increase that small has some impact at the very margins of a deal, but not at the core of it,” he said. “There’s a certain inertia of deal flow that will happen based on the needs of the sellers, and buyers wanting to buy businesses.”

Even one or two subsequent quarter-point interest rate increases won’t slow activity, although they may compress multiples, said Larsen of Barnes & Thornburg. Interest rates are moving off of historic lows and even with a few increases, would remain comparatively low versus rates from a decade ago, he said.

“As long as the interest rate increases are predictable and at the level expected, I really don’t see interest rate rises to be any impediment to the market in 2016,” Larsen said.

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